What is USD Coin and Why Should You Invest in it? The yields have bottomed out and stayed there for a good part of the previous decade. The Fed’s monetary policy is expected to remain loose for the foreseeable future, leaving investors with unimpressive returns on savings accounts and CDs.
This naturally motivates investors to look for alternatives. Ideally, equities would have taken care of investors’ plight. However, they would need to take on significantly more risk or be satisfied with yields of below 3% by investing in non-discretionary industries like utilities.
In such a landscape, the USD coin offers a compelling opportunity. Some platforms offer yields as high as 9% on USDC, which means this stablecoin easily edges out traditional vehicles like CDs or savings accounts.
It’s possible that investors aren’t too familiar with the terms stablecoins or USDC. It’s unlikely they will invest in something unless they have complete information about it – so this article aims to educate investors about USD Coin and why it’s worth investing in.
What is USDC?
To understand what USDC is, it’s important to first understand what stablecoins are.
Let’s look at FINRA’s definition of stablecoins to understand what they are and how they function. FINRA defines stablecoins as “digital assets that aim to manage volatility by tracking the values of more stable assets, such as fiat currencies like the U.S. Dollar”.
Stablecoins are backed by another, more stable asset such as a fiat currency or commodity. Stablecoins work as a value-preserving asset within the DLT (distributed ledger technology). They help minimize administrative load and fees by eliminating the need for conversion of digital assets into fiat.
Essentially, stablecoins offer a mid-way that allows individuals to make cash payments for their transactions or trading digital assets. Stablecoins accomplish this by pegging their value to a more stable asset, usually a fiat currency, and an amount of reserve equivalent to the value of aggregate stablecoins issued is held as a backup.
This has made stablecoins an attractive place to park money in. The following chart confirms this:
USDC is one of the most promising candidates in the stablecoins space. It’s a fiat-backed coin that is pegged to the value of the U.S. dollar.
Centre Consortium launched USDC in 2018 with the support of two key institutions: Coinbase and Circle Internet Financial. USDC, an Ethereum blockchain-based ERC-20 token, is currently the only stablecoin that Coinbase supports.
USDC is linked 1:1 to U.S. dollars and is audited periodically to ensure that it stays an actual dollar. This means you never have to worry about other factors; the USDC will almost always be valued at $1. Investors can easily buy USD Coin from an exchange like Moonpay or Coinbase in less than 60 seconds.
Given that it’s an ERC-20 token, USDC holders can trade it with anybody who has an Ethereum wallet within a few seconds. What’s more, any Ethereum blockchain-based dApp can also be used with USDC, which makes it a popular choice in the DeFi community.
Why It’s Worth Investing in USDC
There are a few things that make USDC stand out from the crowd. These characteristics make USDC an attractive choice among crypto buyers, especially beginners.
1. Easily transferable
Two parties, both of whom have an Ethereum wallet, can transact USDC in a matter of seconds regardless of what time of day it is.
This means even if someone has to send a large payment to a supplier overseas, the payment will reach the supplier within seconds and the process will be as easy as buying something from an e-commerce store. On the contrary, ACH or wire transfers may take anywhere between 1 to 3 days.
It also eliminates the anxiety of fluctuating currency prices since USDC remains stable. Foreign payments come with a hefty fee. With USDC, the only fee a person needs to worry about is the Ethereum gas fee. Also, the fee is not variable which makes it particularly attractive for large payments.
2. Compatibility with dApps
The crypto dApps, blockchain-based gaming, and exchanges ecosystem has been flourishing for the past several years. Since USDC is an ERC-20 token, any app that accepts this standard will accept USDC.
This allows USDC holders to buy a wide range of items in the crypto-verse, including blockchain-based games and collectibles like digital artwork or Gods unchained cards.
What’s more, one can even earn a far higher rate of interest by depositing their USDC into platforms like Compound. This makes them more lucrative than holding fiat currency in the bank.
3. Transparency and security
Circle, an organization that is part of the Center Consortium, issues USDC. It has partnered with Coinbase for its USDC project. Plus, the transactions are audited by Grant Thornton LLP. Involvement of two reputable companies and audit by a leading accounting services firm ensure transparency in the firm’s affairs.
USDC is also a more secure way to hold funds instead of putting dollars in the bank, provided the person uses a private wallet. If someone gets their hands on a person’s login credentials, they can easily access accounts like PayPal or internet banking.
The server stores passwords as a hash, so a hacker may be able to gain access to this hash, run cracking software and get the password. On the contrary, a hacker can get access to a person’s USDC only when they get their hands on the private key which is stored in the USDC-holder’s personal computer.
Unless a person is a well-known, big-ticket crypto investor, the chances of their personal computer being attacked are very slim.
This characteristic is common across all stablecoins. The main reason why some people like stablecoins is because they allow exposure to the crypto space without having to deal with the fear of massive volatility.
For instance, let’s compare how USDC’s prices moved with how BTC’s prices moved over the past year.
The difference in the risk-reward ratio becomes apparent just by looking at the chart’s pattern.
USDC is pegged 1:1 to the value of U.S. dollars, so its value doesn’t fluctuate like that of BTC or ETH. Grant Thornton attests to the reserves monthly, which means investors never have to worry about transparency either.
5. A viable alternative to Tether (USDT)
USDC is more preferable to Tether because there have been instances in the past where Tether’s quality of collateral has been questioned. It’s just easier to stick with USDC since it lets investors get a good night’s sleep.
After all, isn’t risk aversion one of the main factors an investor would choose to buy a stablecoin?
What’s more, platforms like Voyager pay a whopping 9% interest on USDC, while none is paid on Tether. This just tips the scale further in favor of USDC. Questionable collateral and no interest? That’s a raw deal!
Are There Any Risks of Investing in USD Coin?
Yes. USD Coin investments are not risk-free. The most prominent concern with stablecoins is that while it’s not impossible, it’s difficult to verify the exact amount of fiat currency that the issuer holds as reserves. This risk is directly related to a stablecoin’s fundamental characteristic, so it is a big concern.
However, USDC is backed by reputable companies. Add to that Grant Thornton’s monthly audits. These factors confer a lot of credibility on USDC and make it more reliable than other fiat-backed stablecoins like Tether.
There is also an interest rate risk that accompanies USDT deposits. As it becomes more widely accepted, the rates may wither. However, the rates will still be much more attractive than what investors receive from the bank or other traditional channels.
Finally, there’s also a risk of the wallet being hacked. However, this is a risk that investors can avoid by using a cold wallet. It’s preferable to store keys on a computer or storage device that is never connected to the internet.
Even better, investors could use a paper wallet, which is just a piece of paper with private keys printed on it. Investors can store these paper wallets somewhere safe at home or in a bank locker. Using such wallets eliminates the risk of the wallet getting hacked almost entirely.
Feel Confident About Stocking Up on USD Coin?
9% yield is nothing to sneeze at. In fact, for squeezing such returns, investors will need to invest in small-cap equity or a financially distressed asset. Basically, an investor will need to take on a lot more risk to get a 9% ROI.
The risk-reward ratio on USDC, therefore, is quite attractive. Investors will take on much less risk and still manage to get above-average returns.
Though USDC isn’t the best asset for generating capital gains, there are several other benefits of USD Coin for investors as we discussed.
For instance, investors who want to explore the crypto space without taking on excessive risk would prefer a stable cryptocurrency such as USD Coin. USDC is a great option for traditional investors looking for a low-beta investment that can generate returns better than CDs.
This low-beta investment can also reduce the portfolio’s overall risk which can help match the portfolio’s risk profile with the investor’s risk appetite. Its wide acceptance and a slew of benefits make USD Coin a worthy investment.